Robin Mills: Abu Dhabi oil agreements with China continue shift towards new partners

Abu Dhabi's partners for the Adco oil concessions reveal a shift away from the emirate's traditional stakeholders, but this shows that it is keeping up with changes in the region.

The new Abu Dhabi oil industry is taking shape. Last week’s signature by two Chinese companies for stakes in the emirate’s largest producing asset creates a bond that will last for 40 years. Now Abu Dhabi’s energy leaders have to navigate new relationships and show that their novel arrangements will keep up with the region’s measured but titanic energy changes.

On February 19, the China National Petroleum Corporation (CNPC) signed for 8 per cent of the onshore Adco concession; the next day its compatriot China Energy (CEFC) took up 4 per cent. With BP and Total holding 10 per cent each, Japan’s Inpex 5 per cent and South Korea’s GS Energy 3 per cent, this completes the planned 40 per cent foreign stake, Adnoc holding the remainder.

This represents a significant, although not complete, shift away from the emirate’s traditional western international oil company stakeholders. Japan and South Korea are long-term familiar partners; China much newer; and the other big customer for the emirate’s oil, India, is conspicuous by its absence.

2014 was the pivotal year, as Shell and ExxonMobil declined to renew their interest in Adco after it expired in 2014. ExxonMobil had, though, earlier that year extended its involvement with the giant Upper Zakum field by another 25 years, holding 28 per cent in Zadco along with Jodco, an Inpex subsidiary, with 12 per cent. Also in 2014, CNPC formed a joint venture covering a number of small offshore fields and a large part of Al Gharbia onshore. And it was in the same year that operations started for a venture established by the ­Korea National Oil Company and GS Energy to explore three areas.

In October, the operations of Zadco and the other big marine subsidiary, Adma Opco, were merged to increase efficiency. And in January Inpex upped its stake in the offshore Satah and Umm Al Dalkh oilfields.

The next obvious business on the agenda is the 2018 renewal of Adma, which accounts for 655,000 barrels per day of production and currently features BP, Total and Jodco alongside Adnoc.

The new Chinese players, in particular, do not bring special technical expertise. CNPC’s most notable skills are in areas of enhanced oil recovery, which are less applicable in Abu Dhabi. What they do bring is deepened access to the world’s largest oil importer, one which over the next four decades will be the world’s largest economy, one of the dominant political powers and an ever-growing user of Middle Eastern oil and gas.

A stronger foothold here will be welcome. Chinese crude imports grew by 893,000 bpd in 2016, yet the UAE’s shipments there slipped slightly, while the share of key marketing rivals Iran, Iraq, Oman and Kuwait all grew strongly. CEFC, a private company, closely aligned with Beijing’s One Belt, One Road strategy, has emerged from nowhere to amass a range of oil storage and refining assets, not only in China but also Europe.

As oil prices fell Adnoc, like other oil companies, slowed spending sharply and reviewed its projects. Now there are signs that things are getting back on the road. Expansion plans for Adco and Adma have fallen behind, although the target of reaching 3.5 million bpd capacity by next year, from today’s level around 3 million bpd, officially remains in place.

Not just Adnoc and its subsidiaries are being shaken up. The merger of Mubadala and Ipic creates an energy giant spanning upstream petroleum, refining and petrochemicals. But a clear focus is required to generate value from these given the new entity’s investments in other areas, from aerospace, defence and technology to health care, finance and real estate.

Western and Japanese oil demand is flat or falling while China grows. Adnoc’s big competitor Saudi Aramco will sell shares to private investors. Iran and Iraq are haltingly developing their massive untapped oil and gas reserves. Amid these and other competitive challenges, Abu Dhabi cannot rest on the deals done so far – the pace and scope of change must only accelerate.

Robin Mills is the chief executive of Qamar Energy and author of The Myth of the Oil Crisis.

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